The Rebirth of the Actively Managed U.S. Stock Fund

Tyler Durden's picture


By Nic Colas of ConvergEx Group

The persistent negative investment flows at U.S. listed mutual funds specializing in domestic stocks is one of the most important long-term trends catalyzed by the Financial Crisis.  AUM has dropped by $473 billion since January 2007 despite the S&P 500 Index’s essentially flat performance over this period.  The news is no better since the beginning of 2012 – despite the ongoing rally in domestic equities – with $6.8 billion of further outflows year to date.  In today’s note Nic Colas, of ConvergEx analyzes what will reverse this trend along two vectors: the desire and ability of individuals to invest.  The rally in risk assets, along with declining actual volatility, is the best hope for a reversal in money flow trends. Offsetting that factor are continued stresses on household budgets and consumer psychology combined with problematic demographic trends.  Bottom line: domestic money flows have likely become more economically sensitive than in previous cycles


Like many investment professionals who came up through the ranks as single stock analysts, I turn to time-tested but industry-specific paradigms when analyzing unfamiliar business problems.  In my case, that means pulling lessons from a decade-plus of staring at the U.S. auto industry for clues about how and when individuals choose to spend their money on large purchases like cars and trucks.  These products are typically deeply cyclical in terms of demand.  A good year might see 16 million or more units move off dealer lots.  A bad year would register 12 million or less.  Product pricing follows the same contour; a weak market means more incentives – a polite word for the old Lee Iacocca catch phrase, “Buy a car, get check!”


Back in the early 1990s, Chrysler’s chief economist – a talented and gregarious fellow named Don Hilty – walked me through his model for assessing how the American consumer decides it is time to buy a new car.  This calculus was critical for Chrysler, since it had little in the way of overseas operations to buffer the shock of a weak U.S. market.  Getting demand levels correct – and therefore production and dealer inventories - was worth well over $100 million in incremental profits, and Don’s assessment of the market was the lead presentation at every company Board of Directors meeting.  Here’s how he broke down the challenge of calling the domestic auto market:

  • Ability to spend.  This factor centers on employment, wages, and household wealth.  Don focused much more on directional changes than static levels.  Rising employment meant more consumers could qualify for a car loan.  A rising stock market and/or an improving residential housing picture meant buyers might feel a “Wealth effect” and purchase more of Chrysler’s cars and trucks.  Wage growth was often the icing on the proverbial cake.
  • Desire to spend.  Don put just as much focus on how consumers felt about their economic picture as what the numbers said they should feel.  Consumer confidence was just as important a factor in his model as the monthly employment data.

As I ponder the state of the U.S. mutual fund industry, with its difficult five-year track record for money flows out of domestic equity funds, several points of the Chrysler demand model seem to illuminate both current challenges and potential solutions.  A few points to baseline and support this comparison:

  • Money flows out of U.S. stock mutual funds is one of the most persistent trends in global capital markets since the beginning of the Financial Crisis.  From January 2007 to January 2012, some $473 billion has come out of domestic equity funds.  According to data from the Investment Company Institute, there have only been 15 months of positive money flows in these last 61 months.
  • Aside from two large outlier months in 2008 – ($45) billion in October 2008 and ($36) billion in January 2008 – some of the heaviest outflows came in 2011.  The period from June to August last year saw an average of ($25) billion pulled from domestic equity funds every month.
  • What is most striking about this trend is that it breaks with long-held beliefs about how investors behave during bull and bear markets.  The annual ICI factbook (see here: has a chart that shows in/outflows back to 1996 for equity products, and the correlation between performance and capital is undeniable.  Upward trending markets see inflows.  Until now, anyway, when a three year bull market is not enough to entice investors back into U.S. stock funds.

Now, pulling in the Chrysler demand model, let’s see how Don Hilty’s deconstruction of U.S. consumer behavior fits with the seeming anomaly of positive performance and negative money flows.  There is one leap of faith here, but I think it is more of a hop than a running-start jump across the abyss.  We have to think of investing as a consumer good, rather than a purely rational expected return calculation.  That may be unconventional from a pure finance perspective, but the facts seem to fit pretty comfortably inside this paradigm.

  • Ability to spend/invest.  Despite the recent upturn in U.S. economic data, there is no doubt that the domestic economy is puttering along more than it is accelerating rapidly.  Job growth is modestly better, but unemployment is still twice any reasonable estimate of structural (i.e. “Normal”) joblessness.  Wage growth, as measured by Federal tax and withholding receipts, is only higher by 2-3%.  At the same time, headline inflation is picking up, thanks primarily to higher oil prices. Stock returns over the past three years are, of course, profoundly positive.  Still, the longer-term record is stagnant.  And the volatility of the last half-decade means that only the bravest investors had a chance of recouping their losses.  Therefore, any wealth effect is likely muted by investors bailing out at or near a bottom (recall those record negative flow months in 2008) as well as fears that similar volatility may return in the near future.
  • Desire to spend/invest.  U.S. stock funds face two central challenges as they try to turn the money flow picture more positive.  On one count – perceived market volatility – the trend is currently their friend.  The CBOE volatility index has come down to 15, well below its 21 year average of 20, indicating that options markets see below-average near term risk.  Actually volatility is even lower over the past month. Balancing this positive are two concerns – one immediate and one longer-term. In the here-and-now, consumer confidence is still quite low, with the most recent University of Michigan survey registering a surprising drop to the lowest levels of the year.  If you agree that retail investors need to be confident in their own economic future before they will put money back in the stock market, this is a cautionary signal. Over the longer term, many market observers worry that investor demographics may also become an incremental headwind.  The logic here is that as individuals age, they become less willing to take the risks of owning equities and prefer more stable fixed income investments. 


Using the Chrysler vehicle sales paradigm leads me to the conclusion that money flows into U.S. mutual funds face somewhat of an uphill battle, but are probably more levered to the overall state of the U.S. economy than in prior investment cycles.  Investors need the same economic tailwinds as car buyers – incremental cash flow and the confidence to spend it.  If we are at the opening stages of a more durable economic recovery in the U.S., then the inflows should follow.  In fact, money flows may end up being a decent indicator of when/if the current uptick in the economic data is actually self-sustaining.


On a closing note, I think there is another area where the automotive/investment comparison intersects: exciting product.  Chrysler in the 1990s was the hottest domestic auto company because it had a market-leading minivan and was consistently two steps ahead in developing best-selling sport-utility vehicles and newly competitive pickup trucks.  Yes, they had a cyclical recovery at their backs.  But they made the most of it with fresh product that generated showroom traffic and incremental sales.


The mutual fund industry should take note of that lesson.  Money flows will turn positive at some point with an improving economy.  The golden age of the domestic mutual fund had rock star managers – Peter Lynch, John Neff, John Templeton, Mario Gabelli, and scores of others.  I can’t help but think that the next wave of mutual fund inflows will really come roaring back when a new crop of rock stars makes themselves known.  The Exchange Traded Fund industry has a lock on the low cost, index-based, highly transparent, tradable investment product.  Actively managed equity funds need to continue to differentiate their products, and the managers involved represent the best vehicle to deliver that message. 

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Bartanist's picture

IMO, more than anything the world needs to get rid of ALL derivative bucket shops bets and go back to plain vanilla money and investing. If that were the case we would no longer have this massive malinvestment in "non-assets" called assets.... ETFs, CDOs and all the other crap.

If we get rid of "monetary policy" and let the free market regulate prices, then we will have a fair system, even if it is not one that is totally equitable.... or massively expansionary and corrupt.

Zero_Sum's picture

But... But... then 21% of our national GDP couldn't be derived from purely parasitic and completely amoral gamers of the system leeching billions of dollars from unsophisticated retail investors! we can't have that! 

shuckster's picture

Or the huge part of GDP that is the Hospital/Healthcare Industrial Complex which benefits from sickness (and lobbies to keep people sick)

Harlequin001's picture

The whole point is to get you to spend your money on something that is not actually an asset. If you buy an assets it's price goes up, inflation goes up, rates go up and welfare ends, abruptly.

The whole thing is a deliberate scam put in place with the express intent to control rising prices, the idea being to allow govt to print an unlimited supply of currency without the commensurate demand for actual assets which leads to higher prices. That's the reason why there is so much cash now lingering in CB deposits. The system requires that it now be legal and fashionable to deliberately mislead investors as to what they're actually buying supposedly because it is in the best interests of the country. Anyone who buys anything other than govt debt or a derivative is now actively working to defeat the system.

That's the way it is, sadly....

Buy gold, of the physical type.

CrazyCooter's picture

I think what is even *more* telling is the fact that 401ks, all across the US, have gone from cash flow positive equieties to cash flow positive ... cash.

Equities are being shunned by J6P ... because of the lack of prosecutions ... the blatant fraud ... etc etc etc. I mean, how OBVIOUS can it get?

The ramp doesn't mean shit without a bag holder ... that is what is really interesting to me. I have my popcorn on stand by and I am ready to watch shark vs shark!

I am 100% MMMF until at 50% (approx) crash. I like TrimTabs DOW 6000. Sadly, I will go balls deep on equities then, because I figure after hyperinflation (the only outcome I see) at least I will have a shitty peice of common something ... which is better than nothing.



GetZeeGold's picture

401ks, all across the US, have gone from cash flow positive equieties to cash flow positive ... cash.


Halfway there......the smart people are taking the hot QE cash.


They need to finish the process by going physical precious metals.


Joshua Falken's picture

The results over the past five years show that hedge fund industry claims that they will inteligently outperform their benchmark and provide uncorrlated absolute returns is nothing more than baseless propaganda to enrich the managers.

The financial industry goes through expensive bouts of innovative ways to rape their clients until they are exposed and they have to return to the tried and trusted old ways.

There are very, very few individuals who are bright enough to consistently provide respectable annual returns and they are usually not interested in doing it for lots of strangers.

Therefore, investors should just choose ETF's and keep it simple rather than line the pockets of fast talking, mathematically bamboozling emperors who have no clothes.

non_anon's picture

ha ha, bitchez, went cash after getting burned in the tech bubble crash!

TheFourthStooge-ing's picture

from TFA:

I can’t help but think that the next wave of mutual fund inflows will really come roaring back when a new crop of rock stars makes themselves known.

He's placing his faith in the appearance of a new set of pre-indicted Big Swinging Dicks.


Richard Chesler's picture

domestic money flows have likely become more aware of financial thieves than in previous cycles


Jim in MN's picture


Boycott NY/DC

Yes We Can. But Lets Not.'s picture

Muppets unite!!!! MARCH on DC/NYC, by the tens of millions. Especially you youngins, particularly hosed as you are. You should be more far more angry than if, say, your iPad went up in smoke and Facebook locked you out.

Azwethinkweiz's picture

The 20-somethings are mesmerized by a new game called Drawsome. Between that and Words With Friends, good luck getting anyone with an iPad off his/her ass. #BRAWNDO

Yes We Can. But Lets Not.'s picture

...more furious than you'd be if your gubmint, the one you fund, the one that borrows $25 per day, every day, on your behalf, was building a comprehensive, permanent file on you. You know, spying on you. Which it most definitely is.

Yes We Can. But Lets Not.'s picture

More angry than you'd be if you had to pay that $25/day back. Which you do. Plus interest. And if you're worth a shit, you'll be picking up the $25/day for two or three of your less capable brethren, too.

Yes We Can. But Lets Not.'s picture

More pissed than you'd be if gubmint bureaucrats were endeavoring to get involved in caring for your health whether you want that or not. And they are. Your children's too.

Yes We Can. But Lets Not.'s picture

More livid than you'd be if your gubmint - of the people, by the people, for the people - was stealthily and steadily whittling away liberty in your country. Which it undoubtedly is.

UP Forester's picture

Fuck a march.


Save the gas money, buy the three B's and popcorn, and wait for the show to begin....

GetZeeGold's picture


Yeah......watching all the kiddies crapping on cop cars has got me all inspired.....not.


The muppets are ten times smarter than the weirdos on OWS......and even they got took.


This is going to call for something completely different.


non_anon's picture

you fucking muppet lovers, enjoy it

Statler and waldorf (excellent)

andyupnorth's picture

It's the demographics, stupid!

TheFourthStooge-ing's picture

No kidding. Retiring baby boomers aren't going to be buying stocks, they're going to be selling them. Younger workers won't be buying stocks if they still can't afford to move out of their parents' homes. For fuck's sake, that much is obvious.


Bear's picture

Can't borrow no mo from my home to buy stock, I'm HELOCed out

Bear's picture

Just because people are bailing out of mutual funds, doesn't mean that they have stop speculatiing.

I'm sure this has been answered every time this topic appears: "What is net flow including ETF's?"

holdbuysell's picture

This article assumes that the Wall Street way is the only way in the future. No thank you. There's plenty of investment to be had in your local community. There's never been more motivation to simply look for it. It's there.

In other words, if I invest in/with GS, I want Blankfein living next to me. His throat will be the throat to choke if he screws me. And, because he does live next to me, he won't do it or risk himself, his spouse, and his kids becoming ostracized from the community.

Wall Street can stick it. They're damaged goods.

xtop23's picture

If you're at the poker table wondering who the sucker is ...... you're it.

When money managers are refunding customers their capital and calling it a day, you know a market is toast.

They aren't going to draw any real players into this farce again they saw MFG.

They're either sitting it out or on the team.

Let The Wurlitzer Play's picture

First of all the average investor has not stood still.  They have become much more sophisticated largely in part to the internet.  The investment information and tools that joe sixpack has are the same as what the institional investors have (with the exception of illegal insider info - or legal congressional insider info.).  I for one did not think that I would understand global capitol markets and finance five years ago the way I do today and I do not work as an money manager.  In fact I find myself laughing at the so called experts more time than not with their stupid investment ideas.  As far as investing now, I have money to invest but choose not to enter the market because of my personal view of the market and there is nothing Benny Bernanke can do to change my mind (other than he leaves the market).  There is no dobt because of the present un-employment cituation families are having to spend their savings but I would not undersestimate the evolving sophistication of joe sixpack.


lasvegaspersona's picture

One wonders if investors are finally realizing that the data is all cooked and what they are being told just isn't so. Ultimately I'm out of the markets because I believe the markets will largely do what the Fed tells them to do (until they don't of course) and I do not know what the Fed is going to do. If Bernacke would tell me what he tells the big guys (and WHEN he tells them) I might just make a few wagers.

in4mayshun's picture

It seems to me that while there is still a significant percentage of the population that are dumber-than-rocks, many thousands are starting to accept our new economic realities. I am pleasantly surprised with how many individuals I talk to now that believe we are headed off a cliff; not that there is anything we can do about it but hey, misery loves company right

bankruptcylawyer's picture

dude, whoever wrote this has not been reading zerohedge. 


the only decoupling we have seen since 2008 is the decoupling of the stock market from all previous economic and wage growth based models towards a coupling with the plung protection team and the fed's decision to print, blow bubble, let it drop, squeeze shorts, stealth print, and reblow. 



gwar5's picture

Lloyd Blankfein: The Muppets are revolting.

Jamie Dimon: ...Tell me about it. 

Blankein: I don't mean hard on the eyes, Asswipe... I mean they're leaving.... look.

Dimon: OK, so where they gonna go, Douchebag?  We own the rights to Kermit.

Blankfein: Eat a mint already, Smegma Breath, they're taking their money out and we still need greater muppet fools to dump on.

Dimon: Easy, peasy, Scrotum Head.... just call Sesame Street and have Big Bird talk them into killing some more Smurfs. Works every time!

Blankfein: I knew that...  I just wanted to trick you into thinking it was your idea because you have a Camel Toe where your brain is supposed to be.

Dimon:  (.. ... ??Camel Toe Brain??  ...fucker is gooood...) .... whatever, Lloyd.




stant's picture

lets review. my gold is up from 890, my silvers up from 11. and my m1a up from 1100 to 1400. my  1000 lbs of scrap copper is holding its value

Moe Howard's picture

my Pb is up from 5.56 to 7.62

TheFourthStooge-ing's picture

That's a good, solid move. Check your Cu on the margin, as it is likely to have moved up in tandem with the Pb.


chump666's picture

nasty.  from wires:

--Developers struggle in Shanghai as property prices in major Chinese cities continue to fall

upb's picture

just an awesome read  thnx

StychoKiller's picture

Hi cutie, comment here often?  FYI, one should NOT invest with Stockbots unless they're handsome, wooden bots, like myself! :>D

jimmyjames's picture

Aside from two large outlier months in 2008 – ($45) billion in October 2008 and ($36) billion in January 2008 – some of the heaviest outflows came in 2011.


Looks to me like there has been about a 20% investing increase into mmmfs over the last year-still not above positive but an upsurge just the same--usually they're all getting in at the wrong time= late-

Gashole's picture

Does anyone know if these flow of funds data take into consideration ETF flows?

Iam Rich's picture

This is a good question that appears quite a bit during the "domestic equity funds outflow" stories.  I suspect that the vast majority of 401k and similar retirement plans still have no way to access ETF's.  In addition, volume has been very low across all sectors.  Given this, I would guess that ETFs have not picked up the slack.  Just a guess.

unwashedmass's picture

Wall street has stolen the muppets savings twice now --- internet bubble and the housing crash.

and they are wondering why the muppets aren't coming back for another scalping? when the markets are now so blatantly corrupt?

hello? I know they think we're stupid out here, but really.....give me that gold bullion and a few more acres of land...

 and by the way, ben? you can jack the market to the moon, i'm not coming back...


jimmyjames's picture

In my case, that means pulling lessons from a decade-plus of staring at the U.S. auto industry for clues about how and when individuals choose to spend their money on large purchases like cars and trucks.  These products are typically deeply cyclical in terms of demand.  A good year might see 16 million or more units move off dealer lots.  A bad year would register 12 million or less.


From my understanding-they do not track actual vehicles sold from lots-they count them as sold as soon as they send them to the dealers who have no choice but to stock them-whether or not they ever get sold is not calculated-

Most reports I've read-are that dealerships are stuffed with unsold inventory-


On Thursday, we were the first to expose GM's latest strong car sales data as nothing more than the latest in a long series of accounting gimmicks known as 'channel stuffing


Waffen's picture

This story sucks and is shit tier nonsense. 


Now, I thought March 20th was DDay for Greece.  wtf, why arent we talking about this?


why arent we talking about this?

StychoKiller's picture

'Cause no one knows whether the rain is gonna hurt the rhubarb! :>D

GetZeeGold's picture



Translation: The ground shifts daily......ain't no such thing as a hard deadline in this environment.


Ungaro's picture

Simplistic view. The most relevant drivers of MF flows are (1) employment -- people with 401(k)s and IRAs have to put the money somewhere, (2) demographics. Boomers are retiring in droves, many of them early. They tap their IRAs and 401.(k)s for retirement homes and living expenses, and (3) the erosion of trust. The faith and trust of ordinary people in those who "manage" their money is at an all-time low.

I, for one would rather put my money in Asian income properties and European farmland than to let the crooks on Wall Street touch a single dime.

ZippyBananaPants's picture

The fuckers are crooked and I have been telling all my clients and prospects that for years.

I am the reason people are pulling their money out of mutual funds.

Who is with me?